The Cocaine Economy

Drugs are big business, complex and highly profitable. UN estimates put the value of the global illicit drug trade at US$350 billion per year (cocaine generates somewhere between 80-100 billion of the total), one of the top most lucrative global industries, along with arms and oil. (r) The drug economy is integrated through the fabric of all societies and in almost every facet of the global economy: in agriculture, employment, transport, finance, bureaucracy… and that’s just the licit trade. The illicit trade of drugs extends into shipping, arms trading, legal, law enforcement and incarceration costs for starters. When we add to that the other side of the balance sheet, health care and treatment, education and prevention and the social costs borne by society for the management of drug use and abuse we can appreciate the complexity of the economic perspective of “drugs”.

Drugs drive economies, economies depend on them and governments are always walking a fine line between public interest in regulation and control and the huge financial benefits of taxation. Depressed economies can fuel drug use, just as the pressures of a growing economy can. So the swinging pendulum of drug use is highly connected to the fluctuations in the economic aspects of both the drug trade and the economy within which it operates. The drug trade, whether legal, regulated or prohibited will remain a strong driver of the global economy well into the future.

Early Economic History: From Antiquity

Coca has been cultivated since antiquity, traded between Andean communities and used in barter transactions. It served as a motivating force in conquest, a political tribute to whomever was able to conquer regions known for superior coca production and it could culturally and economically sustain and support an administrative regime. In times of famine, it was redistributed as an important means of assisting the populace in survival. It played a role in mediation, and was used as a medium for transactions and deferred payment. (zo)

By the time of the Inca civilization, coca was an important part of the economy, and the state monopoly of production meant its use could be reserved for religious purposes or for those who worked in the mines or for other government approved purposes, although it is likely that all Andeans had access to it in some form. (zn)

Early Modernity

1850s Coca Plantation Peru

By the early 1500’s, the Inca plantations were taken over by holders of Spanish land grants and tax laws were revised to allow growers to make tax payments in coca leaves. By 1539, the Church was collecting tax on production at a rate of 10% of the crop. A rapidly growing agribusiness, it is estimated that by 1575, 82% (between 1500-2000) of European settlers in what is now Peru, were involved in the coca trade, essentially selling coca leaves to the Indians.

By 1600, the coca trade had become a major colonial economic force, with a localised trade valued at half a million pezzos annually, in Potosi alone, with the sale of coca to immigrant workers now commoditised.

By 1700, coca had transformed into a “regional commodity”, yet indirectly crucial to the commercial revolutions of Europe. It “lubricated Spain’s core silver mining enterprise” through its use as a major stimulant for the coerced native workers (as the Inca’s had) as silver swelled the world’s money supply and secured western Europe’s ascension in the world economy. (zc)

Although the coca industry remained regional to the Spanish colonies, other drugs of the “psychoactive revolution” were transforming the economies of Europe as a whole new range of drugs were introduced to an expanding class of consumers, open to anything new in this new era of individualism. The drug trade of the New World expanded the arteries of global trade and defined a new model of trade, profit and taxation, not just in the production and manufacture of the drugs themselves (tea, coffee, tobacco, sugar, chocolate) but in the associated paraphernalia of cups, pots, pipes spoons and so on which were manufactured across Europe. These were massive enterprises, driven by European capital, African and (American) Indian slave labour and a universal and insatiable demand for the whole range of psychoactive products. (r)

Industrial

Europe largely ignored coca until it was discovered that when mixed with ethanol, which helped release the active ingredient, it could be used as  a stimulant. By the 1860s, cocawine (such as the famous French Vin Mariani, a tonic based on a mixture of coca leaf extract and Bordeaux wine), and other preparations were widely embraced throughout Europe and America, and a booming industry in patent medicines and tonics with coca extract as the base was born. Vin Marini was the perfect marriage of wine and coca, as any loss of potency in the coca leaf extract was compensated for by the effect of the alcohol. Vin Mariani found a receptive market in the US, however the later genesis of a similar imitation was to transform the coca industry. Coca Cola was introduced to the market in the mid 1880s and with it, the American obsession with coca led to its unprecedented and enduring commercial success. The addition of the caffeine containing Kola nut to the beverage only made it more refreshing and brought lovers of Coca Cola back for more. Britain and France too joined America’s love affair with coca. But the Germans who had first isolated the cocaine alkaloid from the coca leaf were to rather take to the precision, reliability and intense power of cocaine.

Merck, Germany, late 19th Century

Peru and Bolivia, for various reasons were slow to gear up for the production of global supply of coca, and to overcome the shortage, the European imperialist powers set about establishing coca plantations in their tropical colonies, a sort of “botanical imperialism” which established global supply for an increasing global demand. US officials were actively involved in assisting Peru to upgrade its coca industry. Coca began to be viewed in Peru as a “modernising good” and by the 1889s, the Peruvian coca industry had become a model for modernization as it expanded production and a growing legal crude cocaine industry. By the 1890s, coca and cocaine had become national commodities of Peru, and its industry was shaping global cocaine markets. Legally. (r)

The growing pharmaceutical industries in the US and Europe, in particular Merck (Germany) and Parke-Davis (US) were also dependent on coca production for the manufacture of cocaine, so the stage was set for lasting investment at both the agricultural and manufacturing levels on both sides of the Atlantic.

20th Century

In 1888, Merk’s production of cocaine sat at 300kg, to become its staple product. Cocaine production peaked at 1500kg by 1910, becoming its most profitable line and helping propel Merk’s rapid growth. By 1910, the estimated US use of cocaine was somewhere between 5-9 tons per year, being supplied by both US and European manufacturers.

By 1912, the Dutch colony of Java had become the world’s leading producer of coca, shipping to Amsterdam for the European market. Japan was also a leading producer and when in 1914, the US effectively outlawed the use of cocaine (other than for medical or scientific purposes), other nations were not ready to embrace prohibition. By the 1930s, Japan was the world’s leading cocaine producer (23.3%) followed by the United States (21.3%), Germany (15%), U.K. (9.9%). It took until after WWII (with a weakened Japan and Germany) to properly effect a global ban on cocaine. (zp)

Peru also had a crude cocaine industry that supplied Europe, but by 1915, the legal cocaine trade effectively ended with the US ban enacted the year prior.

So what happens when a booming agricultural and pharmaceutical industry supplying a hungry market is stopped in its tracks? The transition for manufacturing in the legal cocaine industry in the US and Europe was channelled through the production of other products. But for the source of the drug, Peru, Bolivia and Columbia, it became a transition from a legal trade to an illicit one.

Clearly, until the enthusiasm for recreational cocaine use dwindled in the 1930s, cocaine was still widely available. In Europe, much of the illicit cocaine came from pharmaceutical theft, but in the US, most of it came from South America from the growing illegal trade.

The economies of the Illicit activity of the global cocaine traded look something like this towards the end of the 20th century:

  • By the mid 1990s in  Colombia, Bolivia and Peru, cocaine was Latin America’s second most important export after petroleum.
  • The drug’s traffickers reap annual revenues estimated at $9-10 billion.
  • Cocaine accounted for approximately two-thirds of all United States spending on illicit drugs..$31 billion of the country’s $49 billion retail market in 1993.
  • Americans spent more on cocaine than on airline tickets, petrol or magazines and newspapers.
  • Fundamentally, cocaine is an economic phenomenon. It is an important, if illegitimate, producer of wealth and income in South American countries.
  • In the Andean states and Mexico, now the transit center for most cocaine entering the United States, the illegal cocaine economy is intertwined with the legal economy. Its most visible effects-violence, corruption, delegitimation of government and moral decay-are unambiguously negative. Cocaine money has compromised criminal justice systems and governing institutions throughout the hemisphere
  • Mexico’s drug traffickers have established factories, warehouses and trucking companies as legal fronts to take advantage of the cross-border commerce opened up by the North American Free Trade Agreement. Ownership of banks, financial institutions and travel agencies provides cover for laundering drug money.
  • Panama’s General Manuel Noriega reportedly accepted almost $5 million from the Medellín cartel in the 1980s and permitted the cartel to ship more than four tons of cocaine through Panama to the United States. He was convicted by a U.S. federal court in 1992 of drug trafficking, money laundering and racketeering and sentenced to 40 years in prison.
  • In Colombia, guerrilla organizations have collected more than $700 million in the 1990s by taxing the cocaine and heroin trade and by processing these drugs themselves. Other guerrilla activities, including robbery, extortion and kidnapping, yielded approximately $800 million. The war against guerrillas has bled the economies of Colombia and Peru of billions of dollars and killed thousands; in Colombia an estimated 17,000 people died as a result of guerrilla actions between 1990 and 1994.
  • In Latin America the narcotics trade is associated with production and trafficking rather than with consumption. According to a 1992 survey, only 1% of the Colombian population had used cocaine at least once, compared with over 9% of the population in the U.S. In Peru and Bolivia, the figure ranges from 1 to 3%. U.S. law enforcement and public health costs related to drug abuse is estimated by the White House to be $67 billion annually.
  • Estimates suggest that earnings from cocaine’s economic are equivalent to approximately 5% of GDP in Bolivia and Peru and 8% in Colombia.
  • An estimated 450,000 to 500,000 Andeans work in the cocaine trafficking cycle-most in cultivating and harvesting coca leaves and the rest in refining, transportation, money-handling and providing security. About 1.5% of Colombia’s labour force and 3.0% in Peru and Bolivia work in cocaine. (In the United States 200,000 or 0.15% of the labour force have jobs in the cocaine distribution chain.)
  • Ownership of agricultural land by drug dealers directly or through intermediaries increased from 1 million hectares in the late 1980s to an estimated 3 to 4 million hectares in 1993-94 and 8 to 11% of Colombia’s agriculturally usable land by 1996.
  • Cocaine helped Colombia finance negative balances of trade of $1.7 billion in 1993 and $2.3 billion in 1994. The flow of cheap imports, largely financed by drug money, is a major source of such consumer goods as perfumes, clothing, automobile equipment, TV sets and computers. Consumers benefit although domestic distributors and manufacturers of some products suffer.(zq)

In contrast with alcohol, cocaine in the modern era has existed in a state of two extremes, unregulated (with some taxation) or totally prohibited. In the unregulated scenario, it was put to use to boost productivity in arduous workplaces, and medicinally, amongst other things, was used to treat “brain fatigue” of stressed white collar workers. In the prohibited scenario, it is used in much the same way, but through individual administration. Today we use many other drugs to keep the work force going, starting with Ritalin, administered to thousands of children around the world to improve concentration, academic performance and compliance in institutionalised education. As we mature, anti-depressants, anti-anxiety medications and a whole other collection of legal medications keep us marching to work without having to address the cause of dysfunction. Long haul transport workers use legal or illegal stimulants to keep  going and meet deadlines. And most of us make good use of the workplace coffee and tea facilities to get over the 2.30pm afternoon slump.

Unlike alcohol, historically, governments have not had to weigh up the prospect of varying degrees of regulation and taxation with regard to cocaine as the current global regime has been so heavily weighted toward total prohibition.

However, many countries have enacted changes to the prohibition to move towards decriminalization, whilst still maintaining a legal ban on the use of cocaine. This has been done in an effort to reduce harm and reduce the huge financial and social costs of law enforcement and incarceration. In the case of countries like Portugal, it has been to stem the spread of HIV.

We can visualise the incremental ways that changes in drug use change according to the degrees of prohibition and the level of taxation applied to a legal but regulated industry. These can intersect with other matrices which might include punishment and redirection of taxation revenues.